Economics, Policy and Government

Prospects for Indian Development Models – Part 2

Vocabulary

All revolutions begin in dictionaries.[1] I think that all confused thinking begins with an improper understanding of words — and often ends in needless man-made misery. To think and discourse effectively, we must define precisely the words we use. In the context of economics, words like “capitalism” have been misused and the concepts abused to the point that all related discussions are pointless. Douglass North said, “I don’t know what the word capitalism means and therefore I have never used the term.” [2]

If North, a Nobel laureate economist, hesitated using that word, who are we to use the word without at least attempting a definition? Dictionary definitions don’t quite serve the purpose. Every shorthand definition is inadequate for complex concepts. Understanding comes prior to the formulation of a concise statement of the idea, not after. It’s like the mathematical equation E=mc² — you have to understand a truckload of basic physics ideas before you can come anywhere close to understanding what the equation implies.

Capitalism

Take, for example, one of Ayn Rand’s definitions: “Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.” [3] Perfectly reasonable as definitions go but it becomes meaningful only after the concepts of “rights”, “property”, “private ownership” are properly understood. You don’t have to be a pedant to insist on precision of language but basic practicality requires we do the work of figuring out how to say what we mean.

I much prefer to use simple words and build more complex words using them. It’s like building the foundation first, then the first floor, and then on to higher floors. The words that go into the foundation have widely shared denotations and connotations. Trade (or exchange) is one such word. We all understand trade — we traded as small children, we see things traded every day, it is an universal activity. Life would be solitary, nasty, mean, brutish and short without the ability to trade. That instinct is as much a part of being human as the language instinct. Adam Smith wrote about “the propensity to truck, barter and exchange one thing for another …”

Truck, barter and exchange

To trade stuff, we need to have stuff that others value and wish to have, and further they have something that we value and wish to have. Apples and oranges, etc. Two other words are concealed in there. Ownership and scarcity. If something is not scarce, then there is no need to trade it for something else. Sea water when we are standing at the sea shore is not scarce. There I can’t trade you a bucket of sea water for a sandwich. You can take as much sea water as you wish without giving up your sandwich — because sandwich is scarce, and therefore an “economic good” whereas sea water is not scarce and therefore is not an economic good.

But I could offer you five dollars in exchange for your sandwich. Both dollars and sandwiches are scarce. My offer of five bucks means I value the sandwich more than the money. If you accept my offer, it means you value the five bucks more than the sandwich. Therefore if we trade, we are both better off than before. We both win. No one loses when trade is voluntary.

Market

When we exchange stuff, we bring into existence an abstract notion called a “market.” A market is where economic goods (defined above) are traded or exchanged. It can be a physical place but it can be in a “:mental” space (as when I get title to a piece of land by paying for it electronically over the web.) A market is called a “free market” when there are no barriers to entry or exit. A labor market is free when anyone can offer (or refuse to offer) and anyone can accept (or refuse to accept) labor services.

If I offer to work for you for $10 an hour, and you freely accept my offer, it’s a free market. If the government intervenes and prevents you from accepting my offer (because the minimum wage is $15 an hour), it’s not a free market. If the government forces me to work for someone (perhaps itself), it’s not a free labor market — it’s a slave labor market. What a slave lacks is the ability to exit the market. The ability to exit freely is as important as the ability to enter freely.

Capitalism

But what about capitalism, you’d ask. I am coming to that. Once we are done with capitalism, we can talk about what economic development is. And then we can talk whether there is something we can call “an economic development model”, and then we can talk about whether there is a Western economic model, and then we can talk about whether it makes sense to have an “Indian model” and then we can talk about shoes and ships, and sealing wax and kings, and whether pigs have wings.

A preview. Capital is central to capitalism. Well, it is central to (nearly) everything we produce and consume. To understand that, we have to first understand the process of production. We have to focus on processes, not events. Lots of things are processes but are mistaken as events. Politics, for example, is a process. So also the abstract idea of markets — a market is a process, not an event. There are events (exchanges) that occur within the market process but those events are not the market.

There is a lot of debate about what really caused the manifold increases in income and prosperity that advanced economies have experienced, especially the vanguard Western economies such as USA, UK, Holland, France, etc., over the last 200-300 years. Some say “Capitalism”. Others say “Ok, capitalism, but a capitalism built on the blood, sweat and tears of slaves, or a capitalism built on exploitation of colonies”. Still others skirt this whole debate and just say “Ideas, made possible by a certain combination of dignity and liberty that free peoples began to experience in England and Holland in the 17th century” (see Deirdre McCloskey on this). All that is ok. It is useful, I suppose, to identify cause correctly and precisely. What is undeniable, however, is that champions of freedom and liberty have often been caught with their pants down, so to speak.

Here is Phillip Goodchild (who I will recommend to you, Keshav, if you are interested in reading non-Marxist critiques of capitalism) from his 2001 book “Capitalism and Religion”, on John Locke (everything that follows is directly quoted, and it begins after Goodchild has argued that Locke’s ideas of “right” and “liberty” are problematic):

The fact that we are dealing here with artifice – the concepts of right and liberty being alienable from the people who hold them – is demonstrated by Locke’s sophistic defense of slavery, a trade he was able to benefit from personally (Locke’s patron, the Earl of Shaftesbury, had invested heavily in the Royal African Company and Hudson’s Bay Company). One hesitates to mention such ad hominem matters, since Locke’s principles have been subsequently been successfully used to demand the abolition of slavery. The logic of Locke’s argument, however, is highly illuminating. He began by establishing that all have the right to enforce justice by punishing by death those who transgress the laws of property. Now the right to property is claimed through labour; one makes something one’s own by working on it – in labour, time is not given but spent in order to purchase. Indeed, the vast part of the value of things is given by the labor spent on them, so that an acre of land planted with wheat in America is worth over a thousand times more than the profit which an Indian derives from the same acre. Then colonists who meet resistance from natives in their conquest of land have the right to defend themselves against the native aggressors as in a state of war, including the right to kill such thieves. Once captured in war, the native has [quoted directly from Locke], “by his own fault, forfeited his own Life, by some Act that deserves Death; he, to whom he has forfeited it, may (when he has him, in his Power) delay to take it, and make use of him to his own Service, and he does him no injury by it. For, whenever he finds the hardship of his Slavery out-weight the value of his Life, ’tis in his Power, by resisting the Will of his Master, to draw on himself the Death he desires.” [Locke unquote] Liberty and right may thus be suspended, and during the interval of reprieve in which the death sentence is deferred, profitable labour may be extracted by violence. The promise of death creates the life of slavery.

Noted.Thank you for the suggestion.:)
It’s interesting to contemplate though, that if labor creates property, aren’t children property of parents, and if they are, from where does the right of everyone owning oneself emerge?

I have not yet read Ayn Rand’s novels, but I have watched some of her interviews on YouTube.I must make it clear in the beginning that I am enormously prejudiced against her.She strikes me as a very negative and ‘evil’ person.

But keeping that prejudice aside for a moment, I think the fundamental error in all the selfishness or self-centered talk is that in saying that charity and feeling of love or empathy is MEANT essentially and PRIMARILY for gratifying one’s own desire rather than someone else’s, it clubs into the word ‘desire’ very different things which ought to be treated differently as has been traditionally treated differently.

A desire to work for one’s own sensual gratification and a desire to work for someone else’s sensual gratification have ONLY A COMMON ORIGIN IN ONE’S SELF but they are of completely different nature, have different consequences(both externally and internally) and the latter case ISN’T DONE PRIMARILY for one’s self.
The former may at times be malicious.And the latter is seldom malicious to others(it becomes malicious only when done without understanding).

To give an example, “सर्वे भवन्तु सुखिनः” is a desire originating in one’s self but which is oriented at others including oneself.The whole idea of Yajna is to work for gratification of others’ need without creating emotional pleasure in oneself from the act.
The genocide of Native Americans was also self interest, namely, that of the migrants, but it lead to contemptible outcome.
Moreover, the interest originating in one’s self but which is meant for others is elevating and more noble than that which is done merely for oneself.

Market often successfully directs one’s selfishness productively into things which benefit everyone.
Milton Friedman once said, “There’s no virtue in not sinning if an individual is not free to sin.” In a market an individual is not free to sin as he will be bumped out if he does so.
Ayn Rand and others like her overrate practical utility of self interest in a market and celebrate it as a be all and end all of life.To me that is simply outlandish.

P.S.- It’s strange to see Natives being referred as savages and not the ones who genocided them.

@indradeepghosh2
Noted.Thank you for the suggestion.:)
It’s interesting to contemplate though, that if labor creates property, aren’t children property of parents, and if they are, from where does the right of everyone owning oneself emerge?